TMI Blog2020 (8) TMI 90X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of Vodafone M-Pesa Ltd. [2018 (3) TMI 530 - BOMBAY HIGH COURT] has held that the Ld. AO cannot change the method adopted by the assessee for valuing the market value of the shares from discounted cash flow method to net asset value method, which was violation of Rule 11UA and accordingly, the impugned order was to be set aside. Similarly, the co-ordinate bench in the case of Vodafone M-Pesa Ltd vs PCIT (supra) has held that the Ld. AO cannot change the method of valuation adopted by the assessee by merely relying on the actual results in the subsequent years and arbitrarily coming to the conclusion that projections were not achieved. We, therefore respectfully following the decisions as discussed above, set aside the order the Ld.CIT(A) and direct the Ld. AO to delete the additions. - Decided in favour of assessee. - ITA No.3955/Mum/2018 - - - Dated:- 28-7-2020 - Shri Rajesh Kumar, Accountant Member And Shri Amarjit Singh, Judicial Member For the Assessee : Shri Ketan Ved For the Revenue : Shri R.Bhupathi ORDER PER RAJESH KUMAR, ACCOUNTANT MEMBER 1. The Assessee by way of this appeal is challenging the order of the Ld. Commissioner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Date No. of shares Face value Premium Rate Nature of allotment 1 18.10.2013 8024 10/- @ 1987/- Preferential allotment 2 18.10.2013 340 10 1987/- Equity 3 25.02.2014 18 10 / - 1987/- Equity 4 28.02.2014 8806 10/- 26S9/- Equity and accordingly, the Ld. AO called upon the assessee to furnish the basis of valuation for issuing the shares at a premium, which was replied by the assessee by submitting that section 56 of the I.T Act r.w.s. Rule 11UA provides for the valuation of shares and according to the company has valued its shares as per discounted Free Cash Flow Method. The said method uses the future free cash flow projections and discounts them and thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ead of Net asset method. Section 56(2)(viib) of the Act states (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head Income from other sources , namely:- (viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person, being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares . appellant has carried out the valuation of shares under the Discounted Free cash flow method which uses the future projections of financial growth to arrive at the FMV of shares. After perusing the return of income of the appellant for AY 2015-16 2016-17 it is evident that the projections estimated by the appellant are not achieved. Further, the appellant has valued the premium price of shares at R/1,987 oh 25.02.2014 and Rs^2,68S on 28.02.2014 while it has failed to provide any evidences to prove this hike in the projection of the share prices. The appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Ld. AR, therefore stated that it is wrong on the part of the Ld. AO to reject the valuation done by the assessee, as per DCF method and prayed for the bench that additions made may kindly be deleted. The Ld. AR relied on the following the decision in defence of the arguments i.e i) Vodafone M-Pesa Ltd. Vs PCIT [2018] 92 taxmann.com 73 (Bombay) ii) DCIT vs Ozoneland Agro Pvt.Ltd ITA No.4854/Mum/2016 AY 2013-14 dated 02/05/2018 and Vodafone M-Pesa Ltd vs DCIT [2020] 114 taxmann.com 323 (Mumbai-Trib.) order dated 13/12/2019. The Ld. AR submitted that in all these above decisions, it has been held that the Ld. AO is not at liberty to change the method adopted by the assessee at his whims and fancies and is bound by the valuation done by the assessee , as per by the method prescribed under Rule 11UA of the Rules and thus, the prayed before the bench that appeal of the assessee may be allowed. 6. The Ld. DR, on the other hand relied on the order of the authorities below by submitting that the valuation done by the assessee, as per the DCF method was too distant from reality as in the subsequent returns filed by the assessee, the projections were not achieved and thus, the valuat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the wholesale operations from the assessee were taken-over by M/s. Optival Health Solutions P. Ltd., resulting in the assessee company becoming the holding company of M/s. Optival Health Solutions P. Ltd., and both the wholesale and retail operations coming under the assessee company indirectly. He further observed that majority of the small shareholders of M/s. Medplus Health Care P. Ltd., transferred their shares to Mr. G. Madhukar Reddy, promoter and one of the major shareholders of assessee company and Mr. Madhukar Reddy along with other major shareholders transferred their majority of shareholdings at an attractive price to some local and international institutional investors. Out of these transactions, the A.O. observed that two persons i.e., Mr. C. Srinivasa Raju and Chintalapati Holdings P. Ltd., transferred their shares to the assessee on 04.03.2011 at ₹ 75.49 per share whereas, on the same day and also on 08.03.2011 all the other shareholders transferred their shareholdings to the assessee at Re.1 per share. He observed that when the market rate is ₹ 75.49 ps, the assessee has purchased the shares at less than the market price i.e., Re.1 per share and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provision of deemed gift under section 56(2)(viia) of the I.T. Act is applicable. Thus, he adopted the price of ₹ 75.49 ps paid to unrelated parties to be the market price of the unquoted shares of the company M/s. Optival Health Solutions P. Ltd., and the difference of ₹ 74.49 ps per share was treated as Income from other sources in the hands of the company. Further, vide its letter dated 19.03.2014, the assessee submitted that as on 3rd March, 2011, the total value of equity shares of M/s. Optival Health Solutions P. Ltd., was ₹ 45,44,740, out of which, the shares of ₹ 15,90,000 were partly paid i.e., only up to ₹ 0.50 ps and that these partly paid up shares were also acquired by the company from the shareholders. It was submitted that in the case of partly paid up shares, an amount of ₹ 9.50ps is still to be paid by the purchaser and hence, the value of deemed gift in the case of partly paid shares is to be calculated accordingly. After considering the assessee s contentions, the A.O. computed the value of the deemed gift of partly paid up shares at ₹ 10,33,34,100 and of fully paid up shares at ₹ 10,89,39,465 and brought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hearing. In view of the same, ground No. 2 of the assessee is not adjudicated and treated as rejected. 7.As regards grounds No. 3 to 5 are concerned, we find that the undisputed facts are that the assessee has purchased the shares of M/s. Optival Health Solutions P. Ltd., at Re.1 on 4/3/2011 and 8/3/2011 while some of the shareholders have sold the shares of the very same company to the assessee on the very same day at ₹ 75.49 per share. It is also not disputed that the assessee company and M/s. Optival Health Solutions P. Ltd., are related to each other. The only dispute is whether the provisions of section 56(2)(viia) of the I.T. Act are applicable to the facts of the case before us. For the sake of convenience and ready reference, the relevant provisions are reproduced hereunder : Explanation. For the purposes of this clause, fair market value of a property, being shares of a company not being a company in which the public are substantially interested, shall have the meaning assigned to it in the Explanation to clause (vii);] 7.1 Further, the Explanation to clause (vii) to 56(2) of the Act reads as under : EXPLANATION: (b) fair market value o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s conferred a power to do an act and has laid down the method in which that power is to be exercised, it necessarily prohibits the doing of the act in any other manner than that has been prescribed. In support of this contention, the assessee has relied upon various decisions cited supra. Let us now examine the applicability of the said decisions to the facts of the case before us. xxxx Though the facts and circumstances under which the above rulings have been given are distinguishable, we find that the legal principles laid down in the above judgments are clearly applicable to the facts of the case before us. Therefore the question before us is whether the A.O. can adopt the value at which the assessee acquires the shares of the same company on the same day for a higher consideration as the fair market value of the shares or whether FMV is compulsorily to be valued under Rule 11UA of the Act before applying the provisions of Sec. 56(2)(viia) of the Act. 10. From a plain reading of the provisions which are reproduced above and also the precedents discussed above, it is seen that section 56(2)(viia) requires that before application of the said provision, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpute the fair market value in accordance with the prescribed method but cannot adopt the market value as fair market value under section 56(2)(viia) of the Act. The legislature in its wisdom has also given a formulae for computation of the fair market value which cannot be ignored by the authorities below. 12. We find that at para 4.12 of the assessment order, the AO has recorded that the assessee has furnished the valuation of the shares based on the working given under rule 11UA(c)(b) of the IT Rules, according to which, the fair market value of the shares is ₹ 64.48/- (i.e., the value of Optival share is at a negative figure) whereas the assessee has paid at Re.1 per share. He has also observed that no basis is given by the assessee for adopting the rate of ₹ 63.79 per share for purchase of shares by Sri Madhukar Reddy. He observed that there is no basis for transacting in the shares at different rates and that this arrangement has been done to defraud the revenue of its taxes by transacting at abnormally low prices. Having regard to the above observations of the AO, we are of the opinion that if the AO was not satisfied with the working given by the assessee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment actually incurred, though the entire amount of interest was actually incurred in the very first year, the Assessing Officer, in fact, treated both methods of payment at par, which was clearly unsustainable. By doing so, the Assessing Officer, in fact, tampered with the terms of issue, which was beyond his domain (emphasis added).On exercise by the subscriber of the option for upfront payment of interest in the very first year, the assessee paid that amount in terms of the debenture issue and by doing so it was simply discharging the interest liability in that year thereby saving the recurring liability to interest for the remaining life of the debentures because for the remaining period the assessee was not required to pay interest on the borrowed amount. By discharging the liability to interest in the first year of the issue itself, the assessee had benefited by making payment of a lesser amount of interest in comparison with the interest which was payable under the first mode over a period of five years. ..the moment the second option was exercised by the debenture holder to receive the payment upfront, the liability of the assessee to make the payment in that very yea ..... 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